HANMI Semiconductor Co., Ltd.'s (KRX:042700) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 16% over the past month, it is easy to disregard HANMI Semiconductor (KRX:042700). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to HANMI Semiconductor's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for HANMI Semiconductor

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for HANMI Semiconductor is:

33% = ₩204b ÷ ₩624b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.33 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of HANMI Semiconductor's Earnings Growth And 33% ROE

Firstly, we acknowledge that HANMI Semiconductor has a significantly high ROE. Secondly, even when compared to the industry average of 7.6% the company's ROE is quite impressive. Under the circumstances, HANMI Semiconductor's considerable five year net income growth of 44% was to be expected.

We then compared HANMI Semiconductor's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for A042700? You can find out in our latest intrinsic value infographic research report.

Is HANMI Semiconductor Making Efficient Use Of Its Profits?

HANMI Semiconductor's three-year median payout ratio to shareholders is 18%, which is quite low. This implies that the company is retaining 82% of its profits. So it looks like HANMI Semiconductor is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, HANMI Semiconductor is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 16%. As a result, HANMI Semiconductor's ROE is not expected to change by much either, which we inferred from the analyst estimate of 36% for future ROE.

Conclusion

Overall, we are quite pleased with HANMI Semiconductor's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com